If you qualify for Social Security either because you made FICA contributions while you were working or you’re married to someone who did, you automatically qualify for Medicare. And even if you weren’t part of the Social Security system, you may be eligible to purchase Medicare coverage for a monthly fee. You can call 800-633-4227 for information.

A DOUBLE DEFENSE

Medicare actually provides two insurance programs, Part A, which is standard, and Part B, which is optional.

Part A provides hospitalization insurance for everyone who qualifies for or buys Medicare, as well as limited coverage for other in-patient care, such as skilled nursing home stays or skilled home healthcare. The care must be provided in the United States.

Part B is optional insurance that covers medical services, such as doctors’ bills, medical equipment, tests, and some preventative healthcare, such as vaccinations, colorectal and prostate cancer screening, mammograms, and Pap smears. But it doesn’t cover prescription drugs in most cases, or treatment outside the United States.

MAKING MEDICARE CHOICES

If you’re collecting Social Security benefits, you’re automatically enrolled in Medicare Parts A and B, though you have a choice of whether to keep Part B. If you enroll for Medicare before you apply for Social Security benefits, you must decide whether to sign up for Part B.

The second round of choices may be more complicated. Provided you’ve taken Part B coverage, you may be able to choose how you want to receive Medicare services, through Original Medicare or what is known as Medicare Advantage.

Original Medicare — the only Medicare plan that existed between 1967 and 1997 — is still the most popular choice, and the only option available in many parts of the country. It’s a fee-for-service plan that resembles traditional health insurance. You choose your own doctors, as long as they accept Medicare. Your bills are submitted to the plan and you’re responsible for deductibles and coinsurance.

Medicare Advantage plans are available in some places. These plans — known as Part C — include Parts A and B plus drug coverage (Part D). Your premium is larger than the Part B premium but more is covered. You usually must use the plan hospitals and doctors or pay more or all of the cost. Typically your costs are covered by your plan but there may be deductibles or copayments.

PAYING FOR MEDICARE

Medicare Part A is funded by the payroll withholding tax on the salaries of all working people and a matching amount from their employers. You don’t pay anything additional for the services you receive.

You pay for Part B by having the monthly premium deducted from your Social Security check if you get one. If not, you pay the premium directly. Participants whose adjusted gross income (AGI) exceeds levels the federal government sets pay higher monthly premiums than the premiums most people enrolled in Part B pay. Extra amounts are adjusted annually, as the premiums are in most years.

If you sign up for prescription drug coverage available through private insurers, called Medicare Part D, those premiums can also be deducted or paid directly.

WHAT THE ISSUES ARE

The level of comfort you have with making investment decisions is a major consideration in deciding among the various payout alternatives. If you’ve been investing successfully for years, the prospect of building a portfolio you control with a lump sum payout or an IRA rollover can be appealing — and realistic. Your challenge will be producing enough income during retirement.

But if you don’t want to worry about outliving your assets, you may opt for the relative security of an annuity. Knowing that the same amount is coming in on a regular basis makes budgeting — and occasionally splurging — a lot easier.

Periodic payments offer many of the same advantages as an annuity — minus the assurance that your income will last your lifetime. But if you feel you’ll need the bulk of your income in the early years of retirement, this could be the wise choice.

You’ll also want to weigh the amount you’ll owe in income tax. With a lump sum payout, you must pay the total that’s due at one time, which can substantially reduce the amount you have left to invest. With the other options, you owe federal income tax at your regular rate as you receive the money.

NAMING BENEFICIARIES

At the time you’re making payout decisions, you may want to review the primary beneficiary you’ve named on your retirement account and perhaps choose a contingent beneficiary. That would ensure that the person you select would inherit the plan assets directly if you and your primary beneficiary were to die simultaneously.

MEETING MINIMUMS

One thing to keep in mind in choosing a payout method is what will happen when you reach 70 1/2 and must take required minimum distributions (RMDs). If you’ve left your assets in your employer’s plan and have selected a lifetime annuity or periodic payments, the plan administrator is responsible for handling your income payments and ensuring that what you receive complies with RMD rules.

If you select an IRA, your custodian will calculate the account value at the end of each year, which is a key element in the formula you use to calculate RMDs. But you’re responsible for determining the required amount and withdrawing it.

LOOKING AT SPECIFICS

Let’s look at a hypothetical example. Bob and Mary have an income of $100,000 a year before they retire. Since they estimate that they’ll need 80% of their current income to maintain a similar standard of living, they’ll need income of roughly $80,000 from various sources.

Assume they’ll receive $35,000 a year from Social Security and another $25,000 from an employer-sponsored plan. That means even in the first year of retirement, before inflation is a real factor, they’ll have $20,000 less than they need.

Depending on the investments they’ve made, they’ll either have access to enough income to meet their living expenses and have something left for pleasure, or they’ll have to take other steps, including continuing to work, cutting back where they can, liquidating principal, or selling their house.

Assuming that they have accumulated assets worth $600,000, here’s a look at the income their diversified portfolio could produce if it were allocated in different ways. However, remember that these allocations are hypothetical illustrations and are not intended to predict the return on specific investments.

CASH

Bob and Mary invest $100,000 in bank certificates of deposit (CDs) earning interest of 2% a year, or a total of $2,000 before taxes.

They also have the choice of liquidating part of the principal each time they roll over a maturing CD.

$100,000 (CDs) x .02 (annual interest) = $2,000 (annual income)

Advantages
Their investment is insured against loss of principal by the FDIC.

Pitfalls
If they liquidate principal, they’ll have less to reinvest. The interest they earn will decline because it’s being paid on a smaller principal. Similarly, if interest rates decline, their interest earnings would be eroded even if no principal is liquidated. If both were true, they’d earn even less. The risk of keeping more than 20% of a portfolio in cash is the likelihood of earning less than the rate of inflation, so that the interest buys less each year.

STOCKS

Bob and Mary invest $250,000 in stocks and stock funds, with an average annual return of 6%. If they take dividends as cash and sell shares to equal 6% of their account value each year, they’ll have $15,000. But taxes will be due on dividends and any capital gains.

Advantages
Equities have historically grown in value and have been less vulnerable to the effects of inflation than other investments.

Pitfalls
The past is not a predictor of the future. While stocks have performed strongly over time, they do have bad years. If the value of the stocks were to drop, either because of a weak market or a problem with the underlying business, their return would also drop. Bob and Mary might have to sell stock to make up the difference, locking in a loss and reducing the stock portfolio they need to generate future income.

BONDS

If Bob and Mary invest $250,000 in long-term US Treasury bonds, which have an average 5.5% return, they’ll receive an annual income of $13,750 before taxes to help fill in the difference between their Social Security and pension and their projected living expenses.

Advantages
Their investment is presumed safe because it’s an obligation of the US government and the expectation is that payments will be made on schedule.

Pitfalls
Inflation again. Because Bob and Mary are locked into the interest rates the various bonds in their portfolio pay, their buying power will be eroded if inflation rises to a significantly higher level. In addition, the principal amount, when returned, would have reduced value, though they could reinvest it in another similarly priced bond. In addition, if the rates on newer bonds being added to the portfolio are lower, the interest earnings they provide will be less. Also interest income is taxed and their regular rate, not the lower capital-gains rate.

Bob and Mary might invest their retirement assets in other ways, including fixed or variable annuities, mutual funds, and real estate, and arrange to turn that investment into a source of income.

ANNUITIES

They could annuitize the assets in a deferred annuity or buy an immediate annuity that would begin paying income right away. If they selected a fixed payout, they would know from the start how much they would receive for the period of time they chose, which could be as long as their joint lifetimes. If they chose a variable payout, the amount of income might not be guaranteed, because it would be based on the performance of their investment portfolios. But they would be assured of some income throughout the term they chose. The advantage of fixed income is its regularity, while the advantage of variable is that it has the potential to increase over time.

MUTUAL FUNDS

They might arrange with a mutual fund company to pay out their investment in regular installments for the next 20 years. The amount, which they would determine with the mutual fund company, based on the return on the fund, could provide a basic income each year, which could increase if the fund enjoyed strong returns or decrease if performance slowed. In addition to a shortfall, the problem is that one or both of them could live longer than 20 years, outliving this asset.

REAL ESTATE

It’s difficult to predict return on a real estate investment because it depends on where the property is, whether it’s producing income, and how much they pay annually to keep it up. Unless they’re invested in REITs, which may pay a regular dividend, or in income-producing property such as apartments or timberland, real estate can be difficult to convert to a stream of cash.

DOING MENTAL ACCOUNTING

Another decision they have to make is whether they want to preserve some of their assets to provide income for the surviving spouse, transfer wealth to their heirs, or make gifts to charities. If those things are important to them, they might plan to withdraw from accounts designed for retirement income, such as IRAs and annuities, while holding on to investments such as stocks that have no built-in mechanism for liquidating assets.

Different trusts serve different purposes, so you may not be able to find one trust to meet all your goals. However, you can create several trusts to serve different purposes. For example, you may be able to reduce the value of your taxable estate by putting some assets into a trust. Or you may be able to set up the schedule on which your heirs would have access to some of your assets.

THE BASICS

Most trusts work the same way: You, as the donor, establish the trust, and place assets in it. The trust is then run by the trustee whom you name, and will eventually benefit the beneficiary or beneficiaries — the person, people, or organizations that are to receive income and perhaps the principal from the trust. For example, an elderly woman may set up a trust, managed by her financial planner, to support her granddaughters while the young women are in college.

LIVING TRUSTS

If you choose to create a trust that you fund during your lifetime, the trust is called a living trust or an inter vivos trust. You must decide whether the trust is revocable or irrevocable.

A revocable trust is similar to a will. You can change what’s in it and who benefits from it whenever you choose, and its value is counted in your estate at your death. But unlike a will, the assets in a trust do not go through the extensive and public process of probate.

An irrevocable trust is a binding arrangement. You can’t change any of its terms or reclaim an item once you transfer it to the trust. Despite such restrictions, you may want to create an irrevocable trust if your goal is to reduce estate taxes.

To use an irrevocable trust to shield your estate from taxes, you may choose to keep your annual contributions under the tax-free gift limits. Or you can set up the trust using Crummey powers. That means the beneficiaries must be notified that they have the right to withdraw an asset within a set amount of time after you contribute it. But it gives you the opportunity, over time, to shed a lot of your estate value by passing it through the trust to the people you want to benefit.

CHARITABLE LIVING TRUSTS

If you plan a gift to charity from your estate, you might want to create a trust that makes those donations during your lifetime instead.

If you set up a charitable remainder trust, you can choose to donate tax-deductible assets and collect income from the trust for your lifetime or an agreed-upon period. When you die, the trust’s remaining assets go to the charity.

With a charitable lead trust, on the other hand, the assets in the trust pay income to the charity for a specified period of time. When the period ends, your heirs inherit the assets.

A charitable gift annuity is a simpler version of a charitable trust. You make a gift directly to a charity, and in turn they pay you — and a beneficiary you name — a set income for the rest of your life.

MARITAL TRUSTS

If you’re married, you may create a marital trust. If either of you dies, this trust manages the surviving spouse’s finances to help minimize financial decisions. However, you and your spouse may both feel qualified to handle your own finances and decide against a trust.

Generally, unless you’re getting hospice care because you’re terminally ill, or qualify for Medicaid, the state-run health insurance program for people with very limited financial resources, the bills for long-term care are your responsibility.

One solution may be to shift part of this potential financial burden to an insurance company by buying a long-term care insurance policy.

CLOSED DOORS

You can’t depend on Medicare, the federal health insurance plan for people 65 and older and disabled people of all ages, to pay the costs of long-term care. Medicare will help pay for up to 100 days in a skilled nursing care facility after you’ve been hospitalized for the same condition for at least three days, but nothing after that. It will also cover part-time or occasional skilled healthcare in your home when it’s medically necessary.

The key word in both cases is skilled. Skilled care describes medical procedures that must be handled by licensed professionals. If someone without those credentials can provide the care you need, you don’t qualify for Medicare coverage at all.

Conventional medical insurance doesn’t cover custodial care either. And these policies often have payment caps, which means that even if you did qualify for extended skilled care, you would eventually exhaust the maximum your insurer would pay and be left without coverage.

AND AN OPENING

Long-term care insurance is set up to help pay for the costs of care for people who require extended care because of illness, a physical disability, or cognitive impairments such as those experienced by Alzheimer’s patients.

Like other forms of insurance, long-term care policies have caps, or maximum benefit amounts. That means your policy may not pay for the total cost of care. But having this kind of insurance can reduce, sometimes significantly, the amount you’re responsible for paying. That helps protect your estate. Long-term care insurance can also give you more choices in where and how you choose to have your care provided.

PLAN DETAILS

When you’re considering long-term care insurance, it’s important to understand basic plan features and how each of them influences the cost of coverage and the benefits you’ll be entitled to.

A policy will pay a daily benefit, or coverage amount, either directly to you or to the care provider for each day you receive care. You usually choose the amount from a limited set of alternatives that the plan offers.

Each policy also has a specific benefit period, which is the length of time, such as two, three, or five years that the plan will provide coverage.

Each policy has an elimination period, or gap between when you begin to incur costs and when the policy begins to pay your benefit. You might choose 30, 90, or 180 days.

The larger the daily benefit, the longer the benefit period, or the shorter the elimination period, the more your policy will cost. So you have to balance what you might need against what you’re willing or able to pay.

Once you’ve determined your daily benefit and your benefit period, you can also calculate your maximum benefit amount. You simply multiply the daily benefit by the benefit period. For example, if your policy will pay $100 a day for two years, or 730 days, your maximum benefit is $73,000 ($100 x 730 = $73,000).

INFLATION PROTECTION

One of the most troublesome unknowns in healthcare is what it will cost tomorrow, next year, and 20 years from now. At certain times, healthcare expenses have increased much faster than the rate of inflation, and they’ve never been lower than they were the year before.

To offset these increases, many longterm care policies let you buy inflation coverage, which often comes in the form of either a simple or compound inflation rider. The way it works with simple inflation protection—which isn’t available in all states—is that your daily benefit might increase by 5% of the original amount each year, while with compounded protection, it might increase by 5% of the most recent benefit amount each year.

Other policies let you buy supplemental coverage at some point after your policy takes effect to compensate for increased costs. Although the built-in protection makes a policy more expensive, it may be a good option for some people.

THE TIME TO BUY

If you decide long-term care insurance makes sense for you, the next question is when to buy. As with other types of insurance, the older you are, the higher the premium you’re likely to pay for the same level of coverage.

In most cases, you can’t buy a policy after you turn 80, but you can continue coverage under a policy you purchased earlier as long as you pay the appropriate premium and your benefits haven’t been exhausted.

The best time to buy is generally between ages 45 and 65 to balance a slightly smaller premium against a slightly clearer sense of a suitable daily benefit.

MAKING A FUND CHOICE

One reason you may select actively managed mutual funds, which are common in employer plan menus, is that professional managers choose the funds’ investments. They also determine when to sell holdings to cash in on capital gains or prevent potential losses — decisions based on the research from a team of investment analysts. Another appeal is that mutual funds pool assets from many investors, so they are typically able to diversify broadly, providing greater protection against certain kinds of risk.

If you are using funds, it’s important to look for those that invest differently from each other. You can check each fund’s prospectus for its most recent list of holdings and for a statement of its investment objective. If you own several funds invested in large-company stock, you’re probably much less diversified than you want to be.

Similarly, you’ll want to choose funds that invest in a way that’s consistent with their stated objectives and style. For example, if you own a long-term bond fund whose manager decides to sell bonds and hold cash because he or she believes interest rates are going to rise, that move will affect the way the fund behaves.

Any style drift, or shift away from the investments you expect the fund to make, may provide short-term gains. But because the investments in your portfolio are different than you thought, your portfolio will not behave as you expect over the long term.

THE INDEX ALTERNATIVE

One reason index funds and index-based ETFs may attract your attention is that they’re designed to replicate — not beat — the results of the indexes they track. That means there is no issue of these funds making other investments — including those in a different asset class — to improve their return. As a result, they have little style drift.

In addition, index and index-based funds are transparent. That means you know at all times what the fund owns: the securities in the index. Further, turnover tends to be limited to transactions that reflect changes in the index itself. That keeps buying and selling within the funds to a minimum, reducing your short-term capital gains and making the funds more tax efficient than many managed funds.

Of course, index funds and ETFs have their shortcomings — including their performance in a falling market and the extent to which weighting impacts their returns. But very few managed funds outperform index funds year in and year out, and they cost more to own.

INFINITE VARIETY

Your diversified portfolio is likely to be one-of-a-kind because the unique combination of factors that define your goals, timeframe, and risk tolerance won’t be exactly the same as any other investor’s.

ONE BY ONE

You may prefer to choose individual securities within some asset classes, or to use both individual securities and funds. For example, you might create an equity portfolio of large-company stocks combined with small-company and midsized company mutual funds or ETFs. Or you may put together a bond portfolio of intermediate-term Treasury notes and long-term municipal bonds combined with short-term corporate bond funds.

One challenge with an equity portfolio is creating a rich enough mix of industry, market capitalization, or size, and style — that is, growth or value — so you hold some securities that are providing strong returns at any given time. To create a broad mix in a fixed-income portfolio, you’ll want to consider term, issuer, and credit quality, since the highest-rated bonds tend to pay the lowest rates.

Once you’ve built a portfolio of individual securities, you’re also responsible for deciding if and when to sell certain ones. Failing to shed investments that are unlikely to provide consistent future returns can be a drag on performance.

Despite the added work that may be involved, you may find this approach more rewarding personally and financially than a more hands-off investment style.

MANAGED ACCOUNTS

You can also invest in specific asset classes through managed accounts. To have access to the services of a professional investment manager, you work with your financial adviser or broker to select account managers who specialize in the asset classes you want to include in your portfolio.

For example, you might select a manager for US equities, another for non-US equities, and a third for long-term debt. There are also multi-manager accounts, which allow you to spread a certain amount of money across several asset classes. Or, you might prefer a portfolio that combines managed accounts with individual securities and various funds.

CHANGING VIEWS

In the past, influential economists have suggested that between 10 and 30 individual securities were adequate for an individual investor who wanted to manage investment risk. For example, Burton Malkiel, in A Random Walk Down Wall Street, concluded that if you owned a well-diversified portfolio of 20 equally weighted stocks, you had as much risk reduction as you were going to achieve.

More recently, others have suggested a higher number is more appropriate, based in part on the difficulty of choosing specific securities and in part because the increased volatility of the markets as a whole makes it more difficult to anticipate returns.

For many people in the workforce, health insurance is a key employee benefit. The availability of a plan, as well as the quality of coverage it provides, can be a deciding factor in taking one job instead of another — or even being reluctant to leave a job you don’t love.

If your employer or potential employer does offer health insurance, you may or may not have a choice of plans. Typically the more employees there are, the more choice that’s provided. Most employers pay at least part of the premium, or cost of the coverage, and withhold your share from your paycheck each month. Many employers offer the option of adding coverage for your spouse if you are married, your dependents, or a domestic partner, although your share of the premium for this insurance may be higher than your share of your own coverage.

Because an employer plan is group coverage, the premium is likely to be significantly lower than what you would have to pay for comparable coverage if you were buying an individual policy.

THE LAW’S ON YOUR SIDE

If you leave a job where you had health insurance, it’s wise to get professional advice about your rights to continued coverage. For example, you may have the legal right to be covered under a new employer’s plan if you move from a job that provided you with health insurance. And COBRA, the Consolidated Omnibus Reconciliation Act of 1985, allows you to pay for continued coverage under your old employer’s plan if you quit, are laid off, or retire. In many cases, you can extend the coverage for 18 months, or up to 29 months if you’re disabled.

Your dependents are typically eligible for three years of COBRA coverage under the same terms as you are — at 102% of your employer’s cost — when they no longer qualify for coverage under your plan. That might happen if you die, if you and your spouse are legally separated or divorced, or if your children aren’t full-time students after they turn 19.

COBRA also gives you and your former dependents the option of buying a conversion policy. That’s an individual policy with the same company that provides your group plan. You may get fewer benefits than you would through the group plan even though you’ll pay a higher premium.

Creating a household budget can help you in similar ways. By listing your monthly expenses, you can keep track of the amount of money you’ve spent, plan what you expect to spend in the future, and learn where you can cut costs so you can save, invest, or get out of debt.

Once you’ve assessed your monthly finances, you can make a projected budget for the year, writing down what you expect to spend each month based on what you spent last year. As the months progress, you can compare your actual expenses to what you thought you’d spend, and adjust your spending — or your budget — accordingly.

Of course, your budget is not set in stone. It’s a working model. But you’ll know where the money went when you’ve spent more than you wanted to in a particular month or on a particular expense. That can help you control your spending in the future.

GOING WITH THE FLOW

Keeping track of your household cash flow is an ongoing process. You need to track your income and expenses through accounting, analysis, and adjustments.

Accounting is basically keeping a record of your expenditures. Perhaps the simplest way to do your own accounting is to keep and file your receipts. That way, you’ll have a record of the amount, date, and description of the purchase, which can come in handy later. If you don’t like keeping receipts, you can account for your expenses by keeping a ledger or notebook with you when you shop. Every time you buy something, record it in your ledger, and note the purchase, amount, and date.

Once a month, you should analyze the record of your expenditures, and compare it to your projected budget. Analyzing will help you understand whether you’re financially on track. Of course, there are bound to be changes in your life that will alter the way you spend money. For instance, you’re likely to make adjustments to your budget if you get a salary increase or you’re buying a new home. If you have particular goals in mind (like getting rid of your debt), you may have to adjust your resources to meet your goals. That could mean cutting back in certain areas, or reallocating from one area to another.

Ultimately, you’ll have better control over your household cash flow if you take control of your spending.

HOME CHECKING

If simply recording your monthly expenses is still not keeping your finances on track, you have another option: You can choose to open a separate checking account just for your household expenses.

When you get your paycheck, you can deposit it in your general account, and then transfer enough money to cover your estimated household expenses. When you get your household bills, pay for them through the designated home account. This process helps you separate your household bills from other bills, and also lets you deal with smaller increments of money in your personal checking account.

Opening a household account is also the perfect time to get a jump start on investing by opening an investment account. Each time you set aside money to pay your bills, pay yourself a percentage of your earnings too.

INSURANCE BASICS

When you purchase a life insurance policy, you’re agreeing to pay a regular premium, or fee, often on a monthly or quarterly basis. In return, the insurance company agrees to pay a death benefit of a certain value to your beneficiaries if you die. Most people designate their spouses, partners, or children as beneficiaries, but you can choose anyone you want, such as a parent or a business partner.

So how large a policy do you need? There’s no set amount. One rule of thumb says that you should have insurance that’s five to seven times your annual salary, while another says ten times your salary is appropriate. One thing is for sure, though: If you’re like most young people, you have financial obligations like mortgages and children’s tuition ahead of you. So you’ll need more insurance than older people who’ve already paid off those kinds of expenses.

DO YOU NEED IT?

The first question to ask yourself about life insurance is whether you need it. If you’re married or if you have children, then you definitely do. It’s the only sure way to provide income for your family’s financial needs, from funeral expenses to mortgages and education costs.

If you don’t have a spouse or kids, or if you’re planning to stay single, and there’s no one else that depends on you for financial support, then you probably don’t need insurance. If you die and leave debts behind, your creditors can try to collect from your estate. But they can’t collect from your parents or other people unless those people cosigned the loan agreement.

FOR A TIME OR FOR LIFE

There are two main types of life insurance: term insurance and whole life insurance. As the name suggests, a term policy covers you for a set period of time, usually 5, 10, 15, or 20 years. Then you must renew it.

Since term insurance is much cheaper than whole life, many financial experts recommend it for young people. The limited time frame can be good, too, since it gives you the chance to switch over to a whole life policy in the future, if you choose to.

Other advisers suggest you might want to purchase a whole life policy right away. In addition to providing coverage for life, these policies set aside a portion of each premium payment to accumulate as tax-free savings. You can even use these tax-free dollars to pay your premiums on some policies. To help sort out your questions, it may be smart to talk to a fee-only insurance consultant who can explain the pros and cons of each type of insurance. What you need is a neutral perspective.

Withholding makes your life easier, even if you’d rather not have to share your earnings with Uncle Sam. The IRS doesn’t set the amount that’s withheld from your salary or wages. Your employer determines your withholding from the information you provide on IRS Form W-4. You fill out a W-4 whenever you begin a new job, and you can update an existing one at any time to increase or decrease the amount that’s being taken out.

DEALING WITH W-4

To complete the W-4, you must:

• Provide your name and Social Security number
• Indicate whether you’re single, married, or married but withholding at the single rate
• Choose the number of allowances you claim, and decide whether you want an extra amount withheld

Sound easy? On the surface, it is. But there’s a catch. What you’re trying to do is to come as close as you can to matching the amount withheld with what you’ll owe in taxes. That way you avoid the prospect of a penalty for underpaying and the pointlessness of overpaying.

Virtually the only wiggle room you have is in the number of allowances you claim — typically one for yourself, one for each dependent you can claim on your tax return, and one for each factor that reduces the tax you owe. The higher the number of allowances, the less will be withheld from your paycheck, and the higher your take-home pay will be. Conversely, claiming few or no allowances means your take-home pay will be lower but you’ll prepay more.

If your tax situation is pretty simple — for example, if you have just one job and no investment income — you may be right on target by taking one allowance for yourself and one for each dependent. But if you discover in April, when you file your return, that way too much or too little has been withheld, you need to make some changes to your W-4.

HELP OR HINDRANCE?

To help you figure out the right number of allowances, the IRS provides a “Deductions and Adjustments Worksheet.” It’s about as difficult a document as you’ll find anywhere. To use it, you need detailed information about your income, your expenses, your filing status, and any potential adjustments to income.

Don’t hesitate to ask for help, either from your employer or a tax adviser. But be prepared to share last year’s tax return with the person who’s helping you. And ask for an explanation of any solution that’s suggested so you’ll know how to tackle the problem the next time it comes up.

PAYING ESTIMATED TAXES

If you’re self-employed or a freelancer, either full-time or in addition to working as an employee, the IRS expects you to estimate how much tax you’ll owe for the year and pay part of it each quarter, in April, June, September, and January. You use Form 1040ES, “Estimated Tax for Individuals,” to figure your estimated tax and make your payments.

The first payment is due for the first quarter in which you have taxable income. You can pay everything you expect to owe then, in a lump sum, or you can spread what you owe over the rest of the year. The usual way is to divide the total you’re prepaying by four (or however many quarters are left) and pay it in equal amounts. That’s fine if your income is fairly regular and predictable. But you may have a problem if it’s not — something that’s fairly common when you work for yourself.

The solution may be to recalculate the tax you owe each quarter to find the minimum due on each of the remaining dates. You can get IRS Publication 505, “Tax Withholding and Estimated Tax,” or you can consult a tax adviser. In fact, you may want to find one who specializes in clients with self-employment income.

DOUBLE IDENTITY

If you’re paying estimated income taxes, perhaps because you’re a freelancer or self-employed, you have to pay Social Security and Medicare taxes, called self-employment taxes, yourself. The Social Security that’s due in most years is 12.4% of your earnings up to the annual cap. You must also pay 2.9% of your total earnings for Medicare, with no cap.

Those are twice the percentages that your employer withholds if you have a job. That’s because you’re paying two shares — yours as employee and yours as employer. The consolation is that you can deduct half the total, equal to the employer’s share, as an adjustment to income on your tax return. That reduces your AGI, and your taxable income.